Question

How to explain price stability in the context of quantity theory of money and neutrality? Consider...

How to explain price stability in the context of quantity theory of money and neutrality? Consider the Fisher effect and discuss its relation with the real interest rate.

Business   Economics   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

According to quantity theory of money and neutrality, price level doubles with the increase in the quantity of money in the economy. This means the price stability has direct relationship. This means that for the same amount of goods and services consumer has to pay the double amount. The price stability is proportional to money supply in the economy.

According to fisher effects,

Real interest rate = nominal interest rate - expected inflation rate

This means that real interest rates Decrease when there is increase in inflation rate unless nominal interest rate will be same as rate of inflation

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
What is the neutrality of money with respect to the quantity theory of money? A. The...
What is the neutrality of money with respect to the quantity theory of money? A. The money supply can affect the growth rate of prices (inflation) in the long run. B. The money supply cannot affect the growth rate of real GDP in the long run. C. The money supply can affect the growth rate of the real GDP in the short run. D. All of the above.
1. Using the quantity theory of money explain how the Friedman Rule is obtained and its...
1. Using the quantity theory of money explain how the Friedman Rule is obtained and its role for inflation stability. 2. Given the following Cobb-Douglas production function, Y = ALαK(1-α ), demonstrate how you would show (using Excel logic) that increases in labor cause an increase in output but at a decreasing rate.
When Money supply decreases permanently, we know that price level also decreases by the Quantity Theory...
When Money supply decreases permanently, we know that price level also decreases by the Quantity Theory of Money and According to fisher effect and Liquidity preference theory framework, which is MS=L * ( i , Y), we know that nominal interest rate goes up, which leads to an increase in money demand. My question is, by how much does the price level decreases and Money demand increases when MS falls? Do we have one for one relationship among them or...
1. Recall the classical economists and one of their favorite theories: the quantity theory of money...
1. Recall the classical economists and one of their favorite theories: the quantity theory of money and monetary neutrality. The theory is expressed as an equation as follows: M x V = P x Y. What does V stand for? a. the value of the domestic currency b. the velocity of money c. the virtual reality of the universe d. the velocity of investment spending in the economy 2. Following up on question 1 above, what does Y represent? a....
Please show the model and explain the quantity theory of money and how changes in the...
Please show the model and explain the quantity theory of money and how changes in the money supply can affect the FX rate.
Can you explain how the fisher effect theory affect GDP in relation to inflation?
Can you explain how the fisher effect theory affect GDP in relation to inflation?
Use the quantity theory of money to answer the following questions. Find the number of times...
Use the quantity theory of money to answer the following questions. Find the number of times a year on average each dollar is spent when the price level is 20, the money supply is 55,000 and real gdp is 70,000. Calculate the money supply when nominal GDP is $1,254,987 and the velocity of money is 18 and the price level is 7. The growth rate of real GDP is 7%. Assume the growth rate of velocity is constant at a...
The quantity theory of money we discussed in class assumes that the ratio of money to...
The quantity theory of money we discussed in class assumes that the ratio of money to GDP is constant. This can be equivalently expressed by the Fisher equation: M ×V = P × Q Where: • M represents the money supply. • V represents the velocity of money. which is the frequency at which the average same unit of currency is used to purchase newly domestically-produced goods and services within a given time period. In other words, it is the...
What is the equation of exchange (quantity theory of money)? How does it explain changes in...
What is the equation of exchange (quantity theory of money)? How does it explain changes in employment and the price level? Analyze figure 16-7 and explain what happens to inflation and employment as the Fed changes money supply. What are the pros and cons of the Fed’s credit policy?
Consider the equation of exchange (Quantity Theory of Money). Imagine that it is true that velocity...
Consider the equation of exchange (Quantity Theory of Money). Imagine that it is true that velocity is fixed. Show that money demand does not depend on interest rates. If this is true, draw a graph of Money Demand.
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT